Inmet battle goes hostile, investors hope for more

Julie Gordon, Clara Ferreira-Marques

5 Min Read

TORONTO/LONDON (Reuters) - Shares of Inmet Mining Corp IMN.TO jumped Monday after First Quantum Minerals Ltd sweetened its offer for its Canadian rival to C$5.1 billion ($5.2 billion) and said it was taking the deal directly to shareholders in a bid to control one of the world’s largest untapped copper deposits.

The C$72-a-share cash and paper offer, announced by First Quantum on Sunday, tops its earlier bids of C$62.50 and C$70, both rejected by Inmet’s board.

The now-hostile offer sent shares of Toronto-based Inmet up more than 5 percent on Monday to as high as C$74 as investors bet that Vancouver-based First Quantum would sweeten its offer once again.

Analysts said the company might up the ante to secure the blessing of Inmet’s board and gain access to the books on its giant Cobre Panama project in Central America.

“Given the highly concentrated nature of Inmet’s shareholder base ... we believe that a markedly higher offer, likely in the range of C$80.00-90.00 per share, would be required to motivate Inmet shareholders to accept First Quantum’s unsolicited offer,” Canaccord Genuity analyst Orest Wowkodaw said in a note.

Inmet said on Monday it had not yet received the formal offer from First Quantum and advised its shareholders to take no action. Nearly 40 percent of the company is held by only four shareholders, including holding company Leucadia National Corp (LUK.N) and a subsidiary of Temasek Holdings Pvt LtdTEM.UL, the Singapore sovereign wealth fund.

First Quantum’s initial bid last month caught investors by surprise, raising their concerns about the miner’s strategy and stirring speculation that First Quantum itself was facing a takeover attempt. First Quantum has made its name developing projects in Africa at a lower-than-average cost, while estimated costs to develop Cobre Panama are among the world’s highest.

Speaking publicly for the first time since First Quantum announced the first offer, executives told shareholders on Monday the company was not changing its tactics.

“It isn’t that there aren’t projects, it is that you have to find projects that are developable,” Chief Executive and Chairman Philip Pascall told Reuters.

A combination with Inmet would create one of the world’s largest and fastest-growing copper-focused producers, while easing First Quantum’s dependence on Africa and particularly Zambia.

First Quantum plans to use its engineering and construction expertise to slash costs at Cobre Panama.

The current cost estimate for building the $6.2 billion project stands at $23,000 a metric tonne, according to analysts at Nomura, compared with the sector’s average of $18,500. By comparison, First Quantum’s greenfield Sentinel project in Zambia will cost an estimated $6,000 a tonne.

“First Quantum would be open to discussing with the board of Inmet how the benefits of such additional savings might best be shared between the shareholders of the enlarged group,” First Quantum said in its statement.

The group’s executives later declined to comment on whether that meant it could increase the current offer.

FRIENDLY DEAL?

Hostile bids are relatively rare in the mining industry, and First Quantum left the door open for friendly talks with Inmet, expressing the hope that the increased, formal offer would bring the board to the table.

A friendly deal would allow First Quantum a closer look at Inmet’s projects, potentially soothing the concerns of some investors.

“Without prior access to conduct due diligence, the ability of First Quantum to exploit its competitive advantage in capital cost management is likely to be reduced, increasing the risk of overpayment,” Citi analysts said in a note.

First Quantum said its vision of a combined group was shared by Inmet’s “key shareholders” - potentially crucial support, given its concentrated shareholder base.

First Quantum is one of the few global miners primarily focused on copper, with operations in Zambia’s copper belt, as well as in Australia, Finland and Mauritania.

With the Inmet takeover, it would have the potential to produce more than 1.3 million metric tonnes a year by 2018. Inmet owns producing mines in Europe, as well as Cobre Panama, one of the last major available deposits not to be held by a mining major.

Inmet last week raised proven and probable reserves at the Panamanian project by 27 percent.

Under the latest offer, shareholders could opt to receive either C$72 a share in cash, or 3.2962 First Quantum shares plus 1 Canadian cent, for each Inmet share. A second option is a mix of C$36 cash plus 1.6484 First Quantum shares.

Shares of Inmet closed up 4.32 percent at C$72.85 on Monday on the Toronto Stock Exchange, while First Quantum’s closed down 4 percent at C$20.11.

First Quantum said it will finance the cash component through a combination of existing resources and a $2.5 billion facility. Its shareholders will not vote on the deal.